As much as paying debt is important, saving money for emergencies or financial goals is equally important. Paying off your debt can, in turn, free up a more significant chunk of your budget that was being taken up by sometimes hefty monthly payments while saving any additional funds you have in your budget can be helpful and satisfying in preparing for future endeavors. Should you save money or pay off debt? Depending on your unique financial situation, you will find your answer. Below are some factors that can influence your decision.
Know Your Budget
It is very important to have a good understanding of your budget and its capabilities before you make any financial decisions or changes. You will need to know what the extent of your budget is regardless of the option you are choosing over the other. Below is a way of making a list of your monthly expenses if you don’t have one yet.
- Rent or mortgage payments
- Car payments
- Debt payments
- Health Insurance
- Car Insurance
- Grocery spending
- Other recurring monthly obligations
Be sure to include unnecessary expenditures in your budget, such as coffee or dining out, but be prepared to make cuts in this area if needed.
After totaling your regular expenses against your income and you have little or nothing left in your budget, and then you can know where cuts can be made. The following areas can be considered for potential savings:
- Heat and air bills
- Phone and cable bills
- Dining out spending
- Clothing purchases
- Gift purchases
- Grocery spending
Most likely you’ll be able to find savings in one of the categories listed above that can be applied to either your savings goals or debt repayment.
Know Your Savings
Each individual have customized savings goals and priorities. It is important that savings be prioritized over debt satisfaction if your emergency savings are short. You could be further jeopardizing your financial situation if you get in to an emergency state and you do not have any emergency savings. This can however lead to more debt. You can consider the following to determine if you should prioritize savings over debt repayment if you have emergency savings already.
- How soon do you expect or need to accomplish the savings goal in question?
- How important is your savings goal to your financial health?
- Is your current budget, including your debt payments, allowing you to save a substantial enough amount to meet your goal within a timely manner?
- Would paying off your debt potentially enable you to save faster?
Know Your Debt
There is a possibility your debt is stifling your budget and savings goals and that releasing yourself from the liability as quickly as possible. This will allow you to accommodate your savings and financial goals earlier. The following can be considered when you fall in between deciding debt repayment over continuing working on your savings goals.
- How much debt do you have?
- Is your debt affecting your credit score by causing you to have too high a debt to income ratio?
- Are your monthly debt repayments easily met by you each month, or are you struggling to meet your obligations?
- What is your finance terms like? Are you wasting more money than needed by allowing your debt to continue?
Revise Your Budget
It is very imperative you revise your budget to include the new amount you plan on dedicating each month to either savings or debt repayments regardless of the option you are choosing.